The negative ‘reputational impact’ of large banks inappropriately charging customers fees could have a positive impact on the broking industry, as long as brokers “have their own shops in order”, an industry veteran has said.
Speaking to The Adviser, financial services executive and former CEO of mortgages at Barclays Steve Weston highlighted that the recent crackdown on major banks’ handling of fees and incentives (for example, Westpac’s recent announcement that it will be removing product incentives in an effort to address the trust gap in financial services) presents a “great opportunity for growth in the broker sector”.
However, he noted that in order to fully take advantage of consumers’ mistrust in the banking sector, brokers must ensure their own practices can withstand more intense scrutiny.
Mr Weston said: “While banks are being challenged from these reputational impacts, consumers are going to be looking for trusted advisers and are going to be more likely to turn to a broker to get mortgage advice than ever before. This could be very similar to what happened in the UK. At the end of 2009, UK brokers were responsible for less than 50 per cent of new mortgage lending. As a result of the long list of issues that damaged banks' reputations after 2009, broker share now sits at over 70 per cent.
“So, what do we need to do to capture that type of market share in Australia? As an industry, we need to be clearly letting consumers know the benefits of using a broker. We also need to ensure that we have our own house in order including making sure we are dotting our "i"s and crossing our "t"s with respect to being compliant with the NCCP regulations."
In particular, Mr Weston said that brokers need to be more diligent with disclosing material risks when making recommendations, as the interpretation of the regulations could become tougher, like it has in other countries. For example, he said that brokers need to be more specific in disclosing information when customers borrow more than they need, and put the surplus funds in an offset account.
"Whilst that product structure may provide customer flexibility," he said, "our written recommendations should state that if the customer spends the offset balance on holidays and the like, they will need to pay the amount back plus interest".
"Many of us will think that is obvious. Unfortunately, regulations will get tougher and brokers and lenders will be considered the "experts" whilst the customers will be considered to be at a disadvantage as they may only take out one home loan in their life," he added.
He said that caution should also be taken when documenting the risks of interest-only products, and when recommending longer loan terms, even if customers have a demonstrated ability to repay over a shorter term. He added that brokers should also stay close to their customers once they have got their home loan to ensure that the product remains appropriate for their needs.
"That is an area that financial services firms have struggled with around the world," he said.
"From the discussions I have had since returning to Australia, it is an area where both banks and brokers need to do more."
Mr Weston said that the UK mortgage market represents a good learning opportunity for the Australian broking sector.
“If you look at the UK, consumer regulation has toughened up immeasurably and that's not only by the introduction of new regulation, but also by a tougher interpretation of existing regulation. Practices that were once considered acceptable, were suddenly no longer considered acceptable," he said.
According to Mr Weston, industry associations and aggregators have a critical role in educating brokers on how to ensure risks are fully disclosed to customers. In particular, he says this should include providing them with tools such as disclosure templates for use in "higher-risk situations and in ensuring brokers are staying close to customers post-settlement to ensure that product recommendations remain appropriate for the borrower's circumstances".
“And if we do all that right, we'll keep ourselves out of trouble, we'll give customers a better experience, and we will see ourselves go the way of the UK in having more than 70 per cent of mortgages sourced through brokers,” he said.
Mr Weston will be hosting The Adviser’s UK Study Tour 2016 in October, where the mortgage leaders in the UK will further outline the lessons Australian mortgage businesses can learn from the experiences of their UK counterparts.
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